Chanel and Gucci Hike Prices as South Korea and China End Dispute

The countries have agreed to restore ties after a year-long dispute over the deployment of a US anti-missile system, which has been devastating to some Korean businesses that rely on Chinese consumers.

Chanel and Gucci Hike Prices as South Korea and China End Dispute

The countries have agreed to restore ties after a year-long dispute over the deployment of a US anti-missile system, which has been devastating to some Korean businesses that rely on Chinese consumers.

SEOUL, South Korea — China and South Korea are putting a long-running dispute behind them more than a year after Seoul’s decision to install a US Terminal High-Altitude Area Defense (THAAD) missile defense system. The unexpected decision comes just days before US President Donald Trump begins his trip to Asia, where the North Korean nuclear crisis will be the focus.

Both China and South Korea issued a joint statement on Tuesday agreeing to reset relations, which helped propel South Korean stocks to a record high. But while this reconciliation might also seem like good news for brands exporting "Brand Korea" to China, the reality is that despite a seemingly deteriorating relationship, trade between the two countries has been steadily growing over the past year — which means the mended relationship may only accelerate further growth.

South Korea’s exports to China for January to July in 2017 reached $76.2 billion, an 11.5 percent increase over the same period in 2016, according to the Korea International Trade Association, noting that export growth was predominantly driven by consumer goods and cosmetics, along with automobiles. South Korea's total export sales for January to July in 2017 hit $328 billion, accounting for 3.6 percent of the world total of $9.142 trillion.

Tourism was also on the up last year. “The number of tourist arrivals from China decreased in 2015, but recovered to an 11 percent increase in 2016 to reach 6.6 million visitors. Overall retail expenditure by Chinese tourists in South Korea also increased by 10 percent in 2016,” said Euromonitor’s global luxury manager Fflur Roberts in a report. "This shows that South Korea maintains its strong attraction for wealthy Chinese tourists."

The concept of Hallyu — or “Korean Wave” — which emerged in the early 2000s, is clearly still a phenomenon in China as shoppers continue to purchase clothing and cosmetics from South Korea, Asia's fourth largest economy, whose real GDP is expected to rise 2.4 percent in 2017 after gains of 2.8 percent in 2016.

"Around 80 percent of our duty-free shop revenue is generated by customers from China, Hong Kong and Taiwan. In spite of the tough situation with THAAD, Doota's cosmetics, fashion and watches have made remarkable progress. We reached $100 million in revenue in 2016 and $300 million in revenue as of September 2017," said a spokesperson for South Korean conglomerate Doosan Group, which owns Doota duty-free stores and Doosan Tower, a major shopping mall.

According to the Korea Cosmetic Association, Chinese consumers spent $953 million on Korean beauty products from January to July this year. L Catterton, the private equity arm of LVMH, took the leap in 2016 and announced its plans to invest $50 million in Clio, a South Korean colour cosmetics company — the first investment by the French luxury conglomerate in a South Korean company. In September 2017, L Catterton also invested in Korean eyewear brand Gentle Monster.

"Sales of domestic Gentle Monster flagship stores, department stores and duty-free shops have shown a downward trend, but sales in China are steadily increasing," Won Lee, Gentle Monster's chief executive of USA, told BoF. "Although we were first popularised by popular TV stars and the Korean wave, the Gentle Monster brand has not been directly hit by the antipathy toward Korea, because we have developed our strategy with the diversification and globalisation of our markets, consumers and product in mind."

Still, tensions took a toll on some South Korean businesses. Weak sales in China forced the shutdown of at least 87 out of 112 stores owned by South Korean conglomerate Lotte Group, whose duty-free shops stock homegrown labels like Sulwahsoo to luxury brands, such as Louis Vuitton and Chanel. Meanwhile, retail group Shinsegae announced that E-mart, South Korea’s biggest supermarket chain, would be leaving the Chinese market after 20 years.

Korean beauty giant Amorepacific also reported a 58 percent drop in operating profit and a 16.5 percent fall in sales for the second quarter of 2017, compared to the same period in 2016. Operating profit was 101.6 billion won ($91.13 million) in 2017, compared to 240.6 billion won ($215.13 million) in the same period the year prior. Net profit plummeted by 59.8 percent year-on-year.

Burberry and Kering remain the most exposed to South Korea with their stores.

However, analysts suggest that as the South Korean economy continues to grow — in part spurred by mended relations with China — there is ample opportunity in its luxury goods market, which is valued at 13 trillion won (about $11 billion) and accounts for just under 3 percent of the global market, according to data from Euromonitor. “With real value growth of 44 percent in the five years to 2016, South Korea currently stands as the fourth fastest growing luxury goods market in the world behind India, Malaysia and Indonesia,” said Roberts.

Some Korean customers say that luxury brands are already taking advantage by inflating prices. This week, local outlets reported that Chanel had raised the prices of its popular products, making it the third price rise by the French house in Korea this year.

The price of a small Boy Chanel handbag will be 5.49 million won ($4,942.2), up from 5.23 million won ($4,708.3), and large ones for 6.1 million won ($5,491.5), up from 5.83 million won ($5,248.5). In comparison, prices of a small Boy Chanel handbag in the UK is about £3,200 (about $4,231) and large ones at about £3,890 (about $5,143.3). Prices of the 2.55 Classic and Mademoiselle Vintage bags sold at Korean department stores were also raised by up to 17 percent.

"After one year of stable prices, we have decided to adjust the prices of our permanent handbag models around 5 percent, in light of the increase in our production costs and raw material prices. These adjustments also take into account exchange rate fluctuations, and are in line with our price harmonisation strategy to avoid excessive price differentials among markets," a spokesperson for Chanel told BoF.

Gucci, too, raised prices in Korea this month for products, such as handbags, shoes and leather accessories. A Korean representative also said the move was part of its global pricing policy. Some experts, however, suggest that luxury brands could be taking advantage of Korea’s wedding season as Chanel handbags are popular wedding gifts.

Burberry and Kering are best positioned to benefit from expansion in South Korea, Exane BNP Paribas shared with BoF in 2016. Burberry has nearly 10 percent revenue exposure to South Korea, the highest of any luxury brand, followed by Kering, with almost 6 percent exposure. “In 2017 they remain the most exposed to South Korea with their stores,” said Luca Solca, head of luxury goods at Exane BNP Paribas.

South Korea’s president Moon Jae-in and China’s Xi Jinping are expected to repair ties on the sidelines of the Asia-Pacific Economic Cooperation forum in Vietnam, which takes place in November.